26 July 2012
Summary of Analyst Report: Sunway Bhd target price RM.2.93, Buy - Hong Leong Investment Bank Research
Sunway's share price has been relatively muted after it was revealed that the company (by May) had not launched any new property projects while guiding down its new launches from RM1.5bil to RM800mil (based on effective stake).
The lower revised target was mainly due to the postponement of about RM300mil gross development value (GDV) based on 60% stake for Sunway Geo located at South Quay and RM180m GDV based on 60% stake in Tianjin, China.
The former is due to the slower take-up rates for its existing projects i.e. LaCosta Condominium (GDV: RM242mil, 51% take-up), while the latter is due to tightening policies in China.
Although investors may perceive this negatively, Sunway tends to launch its products at a premium of some 10% to 30% compared with its neighbouring developments, hence the take-up rate for new launches has been slower compared with the rest of its peers.
Before the merger, its take-up rate had been approximately 60% to 70%, and only jumped up to 90% in the financial year ended June 30, 2011 (FY11) after the merger.
We applaud the management's decision to roll back its new launches. Firstly, it will avoid having unnecessary working capital tied in.
Secondly, with a higher take-up rate target, it will translate to faster monetisation of its development projects.
Hence, we believe that we are beginning to see the positive changes arising from the merger in the form of prudent risk-adjusted development ventures to ensure that shareholders' interests are protected.
So far, Sunway's new major launch has been from Pasir Ris, Singapore, with a GDV of some RM266mil (based on 30% stake).
The balance of launches will be sporadic around Penang, Ipoh, Equine Park, etc, places where the management is confident about take-up rates.
Despite the lower target of new launches, it does not indicate that Sunway's new property sales will be badly affected.
As of the second half of 2012, the company has already achieved new property sales of about RM600mil, a sharp increase of RM426mil in new sales achieved for the second quarter compared with only RM174mil new sales in the first quarter.
By simply annualising the new sales figure, which works out to new sales of some RM1.2bil, we believe Sunway will exceed their new sales target of RM800mil and touch close to the previous new sales target of RM1.4bil.
We estimate that Sunway has an unbilled property sales of about RM2.1bil, translating to 2.3 times FY11's property revenue.
By assuming just the book value of the property and property investment division, our base case valuation for Sunway works out to RM2.48.
Including dividend yield of 2.3%, there is still 10.6% upside from the current price level, hence we believe that the company remains undervalued.
Earnings for FY12 and FY13 have been cut by 3.5% and 12% respectively to reflect slower property earnings contribution while introducing our forecast for FY14.